Fabig v Photon Group [2010] NSWSC 358 | Case summary

1 HIS HONOUR: On 3 July 2006, a share purchase agreement was made between a number of vendors, including the plaintiff, Ms Fabig, and the defendant (Photon). The share purchase agreement was varied by a deed of variation made on 2 November 2006. One of the matters effected by the deed of variation was an agreement that Photon should buy shares in the relevant company that the vendors had retained after, and on the terms of, the share purchase agreement. 2 The consideration payable by Photon for those retained shares included three elements. The third of those elements was described as "the additional amounts provided for in Schedule 1". 3 Schedule 1 provided for payment of additional amounts on 30 September 2008, 30 September 2009, 30 September 2010 and 30 September 2011. The additional amounts to be paid are calculated by a formula that takes into account the earnings before interest and tax (EBIT) of the group of companies including the company whose shares were sold, as defined in the schedule. There is a "gateway" to any entitlement under Schedule 1. Nothing is payable if the EBIT of the group is less than or equal to a specified figure. 4 Clause 6 of Schedule 1 reads as follows: 6. Any dispute as to whether or not there is an entitlement under, or as to an amount calculated for the purposes of, this Schedule 1 must be resolved in accordance with Paragraphs 4 to 15 of the Schedule 3 of the Share Purchase Agreement. Paragraphs 4 to 15 of Schedule 3 of the Share Purchase Agreement are incorporated by reference and apply as if set out in full in this Schedule 1. 5 As will be seen, cl 6 takes one back to cls 4 to 15 of Schedule 3 to the share purchase agreement. In essence, those clauses provide for a carefully controlled procedure for the resolution of disputes in relation to amounts that were payable under the share purchase agreement. I set out those clauses: 4. The calculation of payments to be made under this Schedule must be performed by the Purchaser (or its auditor or financial advisor) and full Particulars provided to the Vendors in writing no later than 20 Business Days prior to the date of payment. 5. Calculations under this Schedule must be made on a "stand alone" basis for the Group, and must not include any costs which are not envisaged in a business plan or budge approved by the board of the Company or which otherwise arise in the ordinary course of business of the Group. 6. The calculations in this Schedule must be performed in accordance with, in order of precedence: (a) the specific principles set out in Clause 5 of this Schedule; (b) where an item is not covered by the principles referred to in Clause 5 of this Schedule, in accordance with the Accounting Standards; and (c) where an item is not covered by the principles referred to in Clause 5 of this Schedule, in a manner consistent with the principles, policies and procedures used to prepare the Accounts. 7. The Vendors must complete their examination and review of the calculations provided by the Purchaser under Clause 4 of this Schedule, prior to the date of payment by the Purchaser. 8. If the Vendors do not agree with the full particulars provided to them by the Purchaser under Clause 4 of this Schedule, they must serve notice on the Purchaser setting out: (a) the matters in respect of which they disagreed (Disputed Matters); (b) the grounds on which they disagree and; (c) their opinion as to the adjustments required to the calculations. 9. If the Vendors do not notify the Purchaser of any Disputed Matters as required under Clause 8, then the calculations will be deemed to be final and will be conclusive, final and binding on the parties. 10. If the Vendors serve notice under Clause 8, the Vendors and the Purchaser must enter into good faith negotiations and use all reasonable endeavours to agree the Disputed Matters and the payment of the relevant Tranche shall be delayed for up to 20 Business Days, until agreed. 11. If the Vendors and Purchaser cannot agree the Disputed Matters within 20 Business Days (or such longer period as the parties agree) then the unresolved Disputed Matters must be referred for resolution to an independent person agreed by the Vendors and the Purchaser within a further 10 Business Days. If they cannot agree on who the independent person will be, the Vendors and the Purchaser must promptly request the President for the time being of the Institute of Chartered Accountants in Australia to appoint an independent person to determine the unresolved Disputed Matters. The person agreed or nominated under this Clause will be the expert for the purposes of the Schedule (Expert) . 12. The Purchaser and the Vendors must instruct the Expert to: (a) decide within the shortest practicable time the Disputed Matters, by applying the principles set out or referred to in this Schedule; (b) deliver to the Purchaser and the Vendors a report (Expert's Report) stating, on the basis of the Expert's decision, its opinion as to: (i) the Disputed Matters: and (ii) the allocation of the Expert's costs in accordance with this Schedule, and including a copy of the amended calculations (if any). 13. The parties must provide, and use reasonable efforts to procure the provision of all information and assistance the Expert reasonably requests for the purpose of the Expert's Report and: (a) the Expert will act as an expert, not as an arbitration, in determining the dispute; (b) the Expert's determination in relation to the Disputed Matters and the allocation of its costs must be made as soon as possible; (c) the Expert's decision is final, conclusive and binding and payment must be made within 10 Business Days of the decision; (d) the Expert must, if a binding decision is reached and payment is not made within 10 Business Days thereafter, make a determination as to the current market valuation of the Shares and at the election of each Vendor Shareholder the Purchaser must transfer back to the Vendor Shareholder a number of Shares having a market value equal to the total portion of the Earn-Out Price determined as payable to the Vendor Shareholder. 14. Each Party must bear its own costs in complying with this Schedule, but the costs of the Expert (if appointed) must be paid by the Party against whom the determination of the Expert is made and the parties must instruct the Expert to make a decision on this matter. If the Expert is, for any reason whatsoever, unable to make a decision on the matter and so certifies this, the cost of the Expert must be shared equally and paid by the Vendors (as to 50% in aggregate) and the Purchaser. 15. Where an Expert has made a determination in relation to any amount due to be paid by the Purchaser under this Schedule but unpaid, that unpaid amount will attract interest payable by the Purchaser on demand, accruing from day to day, from the due date up to the date of actual payment, before and after any judgment, at the default interest rate of 14%, calculated daily, for each day on which that sum is due and not paid or underpaid. 6 Against that background, it is necessary to note that Ms Fabig commenced proceedings seeking declaratory and other relief. She asserts that the group, the EBIT of which is relevant to the calculation under Schedule 1 to the deed of variation, of a company known as Geekdom Pty Ltd (in case it is not clear, it would appear that the activities of Photon and its related companies include activities relating to electronic transactions and information). On that basis, Ms Fabig asserts; she is entitled to be paid, pursuant to Schedule 1, an amount in excess of $4.4 million for the payment dates 30 September 2008 and 30 September 2009. 7 It appears that Photon asserts, as a preliminary matter, that whether the EBIT to be considered is that of the company whose shares were sold only, or the EBIT of that company and others (as Ms Fabig asserts), the amount in question fell under the "gateway" amount referred to in cl 2 of Schedule 1, so that nothing is payable, for either of the years in question, under cl 1. 8 However, Photon has not articulated its position in any defence. That is because it seeks orders that the proceedings be stayed to enable the dispute resolution procedure set out in cls 4 to 15 of Schedule 3 to the share purchase agreement, in so far as those clauses are applicable to the dispute that I have outlined, to be worked through. It seeks other orders, including that the proceedings be transferred to the Commercial List and that certain subpoenas issued at the request of the plaintiff for the production of documents be set aside. 9 It will be seen from cls 4 to 15 that, in respect of "Disputed Matters" to which those clauses relate, the expert determination provision is mandatory (cl 11) and the decision of the expert, when made, is "final, conclusive and binding" (cl 13)(c)). 10 There is no doubt that, where parties have agreed to an extra-curial dispute resolution mechanism, the Court has power to enforce it, including by granting a stay of proceedings until the mechanism is followed through. That proposition was not in dispute, and it is unnecessary to refer to the authorities by which it is established. 11 In the case of expert determination, it is also clear that the Court may grant a stay where expert determination is mandatory, its outcome will be final and binding and the procedure is sufficiently comprehensive to be capable of meaningful enforcement. Again, those propositions were not in dispute and it is unnecessary to refer to the authorities by which they are established. 12 The ambit of the debate, for today's purposes, shifted somewhat in the course of submissions. I do not propose to trace the various twists and turns. It is sufficient to state that in my view cl 6 of Schedule 1 to the deed of variation applies not only where there is something that could be regarded, mutatis mutandis, as a "Disputed Matter" defined by cl 8(a) of Schedule 3 to the share purchase agreement, but more widely. That is because, as cl 6 states, it applies not only to disputes as to amounts (which are the sort of disputes apparently contemplated by cls 4 to 15) but also to disputes as to whether or not there is any entitlement at all. At least in the latter case, and perhaps also in the former case, it may be that the mechanism of cls 4 to 15 requires some adjustment to be capable of application; but that does not seem to be a major problem. In principle, I think, the mechanism provided by cls 4 to 15 could be adapted to any dispute to which clause 6 applies. That is so whether the dispute is one as to entitlement, one as to quantum or one as to both. 13 In the present case, if I am right in thinking that the key point is whether the gateway has been traversed, or opened, that is something that is capable of resolution under the expert determination provisions provided by cls 4 to 15. 14 However, that is not the end of the matter. When one says that cls 4 to 15 apply to a dispute as to entitlement, they apply according to their terms in so far as those terms are applicable. Specifically, Photon is required to provide a calculation of the payment to be made under Schedule 1 to the deed of variation within 20 Business Days prior to the date of payment: that is to say, prior to 30 September 2008 (in respect of the first payment) and 30 September 2009 (in respect of the second). If Photon wishes to contend that nothing is payable because the gateway has not been passed then, if the mechanism of cls 4 to 15 is to be applied, it must so inform Ms Fabig, and provide such particulars as are necessary to enable her to understand its assertion, no later than 20 business days prior to the relevant dates. 15 If those steps are taken then, again with appropriate adjustments, the following steps, to the extent that they are applicable, must be followed through if a dispute is to be crystallised which attracts the provisions of the expert determination clause. 16 In this case, so far as the evidence goes, it was not until 28 October 2009 that Photon provided a statement of its position, with reasons, as to the payment (if any) due on 30 September 2008 and 30 September 2009. I say "so far as the evidence goes" because I was "informed", from the bar table, that there had been a deal of to-ing and fro-ing between the parties, but on "a without prejudice" basis, before the letter of 28 October 2009 was sent. However, on the evidence and, in so far as I have understood them properly, on the parties' submissions, it is that letter which constitutes the articulation of Photon's position for the purposes of cl 4 of Schedule 3 to the share purchase agreement (in so far as that clause is applicable to the dispute which has now crystallised under cl 6 of Schedule 1 to the deed of variation). On that chronology, it could be said that Photon, having ignored for well over twelve months its obligations under cl 4, and having to that extent frustrated or delayed the succeeding provisions which set out a timetable of steps to be taken to lead to the crystallisation and resolution of the dispute, now nonetheless wishes to hold Ms Fabig to the contractually agreed dispute resolution mechanism. 17 The conclusion to which I have come, as to the operation of cl 6 and the applicability of the dispute resolution procedure to disputes as to entitlement, means in my view, that the ground for a stay may have arisen. That is because there is, in my view, a dispute as to whether or not Ms Fabig has any entitlement to be paid, under Schedule 1, for the Payment Dates 30 September 2008 and 30 September 2009. However, it does not follow, taking into account the egregious tardiness with which Photon attended (or failed to attend) to its obligation to state its position, that the dispute still falls within the intent of the dispute resolution provisions. That is because those provisions are clearly intended, and structured, to produce either agreement or a crystallisation of the real dispute within a short time, and expert determination within a further short time. The intent, if not the legal operation, of those provisions has been frustrated because it is not possible for the dispute to be resolved by expert determination within the short timeframe contemplated by cls 4 to 15. 18 In those circumstances there is, I think, a real question as to whether, on discretionary grounds, any entitlement to a stay (using "entitlement" in the sense of a legal right arising from the engagement of the dispute resolution procedures) should be enforced. 19 If the matter were to be looked at in terms of specific performance of contractual obligations, one might well ask why a company, in substantial default of its obligations, should be able, upon egregiously late performance of those obligations, to hold the other party to her obligation to submit the dispute to expert determination. The answer to that question is not obviously in favour of the company. 20 Equally, if I am right in thinking that the intent of cls 4 to 15 is to produce an expeditious identification of the real dispute and an expeditious resolution of that dispute, one might ask why a party, in delay to the extent that Photon is, should be entitled to call those provisions in aid, as a matter of discretion. 21 As I have said, I am prepared to proceed on the basis that there is a dispute to which cl 11 of Schedule 3 to the share purchase agreement applies. Thus, I am prepared to proceed on the basis that a ground has been shown for the grant of a stay. However, bearing in mind the delays that have occurred, and the discretionary considerations that I have outlined, I conclude that a stay should not be ordered. 22 That leaves the consideration the questions of transfer to the Commercial List and setting aside of the subpoenas. Having regard to the conclusion to which I have come, it was common ground that the proceedings should be transferred to the Commercial List. That however does not dispose of the subpoenas. In my view, in circumstances where the real issues in dispute have not been narrowed by pleadings or (as will now be the case) their equivalent, the subpoenas are premature and could be seen as an exercise in fishing. Further, bearing in mind that the proceedings will be transferred to the Commercial List and will be case managed in accordance with the procedures of that list, there will be the opportunity to obtain discovery (including from third parties, if that is relevant) once the issues are defined. In those circumstances, I think, the subpoenas should not stand. 23 In those circumstances I make orders in accordance with prayers 1 and 3 of the defendant's notice of motion filed on 1 March 2010. I order that the notice of motion otherwise be dismissed. 24 Mr Morahan of counsel, for Ms Fabig, asks for costs. Mr McClintock, of Senior Counsel, who appeared with Mr Hmelnitsky of counsel for Photon, said that costs should be reserved because the likely ultimate outcome - reference out - might be in effect what would have happened had cls 4 to 15 been followed through. 25 Mr McClintock did not dispute the proposition that the substantive issue was whether or not there should be a stay, and that if costs were to follow the event, the dismissal of the application for a stay was the relevant event. He was right not to dispute that proposition, because the debate as to subpoenas was extremely limited in scope, both in terms of the amount of paper that it consumed and in terms of the oral submissions addressed to it. 26 The other question requires perhaps a little more attention. It was raised in the course of submissions on the discretionary exercise that I have dealt with. I accept that it is likely that the dispute, when it is articulated by quasi-pleadings, will be referred out, either in whole or in part. I accept that the likely referee will be an accountant - that is to say, someone who was capable of having been appointed by the President for the time being of the Institute of Chartered Accountants in Australia under cl 8 of Schedule 3. But there is one significant difference between the contractual procedure and a reference out. The outcome of the contractual procedure is final, conclusive and binding, assuming that the expert carries out, or on the face of things appears to carry out, the task entrusted to him or her. The outcome of a reference is not final and binding. The Court has a discretion whether or not to adopt the report. Thus, although it is true to say that the gateway question (and any other questions that may be articulated) may well be the subject of expert consideration, it is not correct to say that the outcome of that consideration will be final and binding. 27 In those circumstances, it does not seem to me that the likelihood of referral out has a great deal to do with the question of costs. For those reasons, I order the defendant to pay the plaintiff's costs of the notice of motion. I stand the proceedings over to the Directions List on Friday 30 April 2010.

Fabig v Photon Group

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Judgment (11 paragraphs)

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